Cost of components and R&D as percentage of sales price?

[ringenesherre]

In discussion about our favorite hobby I have from time to time encountered the view that component costs as well as research and development costs are only a tiny fraction of the final sales prices.

 

This is clearly true for a lot of consumer-grade audio equipment (think Bose / Logitech), where the costs for marketing, distribution, sales plus the profits for producer, wholeseller and easily represent 90% of the final sales price.

 

My impressions with "higher-end" audio equipment (both pro-audio and hifi) on the other side have been mixed. Let me share two of them:

 

Some time ago I was looking into purchasing a passive pre-amplifier. I found the prices of e.g. the Goldpoint SA1X (Goldpoint SA1X Level Control / Passive Preamp) to be quite high for "just" a stepped attenuator, a simple case, four XLR plugs, and a few cm of cable. So I decided to build one myself - could be fun, I get to select all parts, and it is a really simple setup. After selecting a high-quality stepped attenuator from Danish Audio ConnecT able to handle four channels (for balanced stereo), a fitting case from an Italian manufacturer, and some off-the-shelf Neutrik XLR plugs, I had already passed the sales price point of the Goldpoint SA1X. Clearly, Goldpoint get better volume pricing etc., but I cannot imagine that the parts of their product make up for less than 50% of the final price.

 

On the other hand, there are products like Audio Notes monoblock amps for a pair price of $250,000. Here I have a hard time believing that component costs and research and development can account for e.g. 50% of the price (even when selecting the most expensive op amps, tubes etc. and coating the damn thing in gold).

 

What is your experience with this? Do you see the percentage for components and R&D costs increase with the move to smaller, higher-end producers? Where do you see the best price/performance? Obviously, paying $500 for a consumer grade product will give you at most $50 in parts and R&D. Is that bothering you? Is it better to spend $2000 for a directly marketed product, where you will receive significantly more for you buck?

 

Cheers,

Peter

[Miska]

I cannot say so much about high-end hardware R&D/BOM, but from what I know of mainstream consumer electronics BOM part of the final sales price is typically around 10%.

 

My own A/D/A converter box took me about one year to design and it takes about a week for me to manually put it together. Cost of components per unit is around 1000€, without fancy looking case. Taking it to a final end-user product would make it cost ridiculous amount of money at predicted sales volumes (couple of units per year)...

 

Software on the other hand doesn't cost so much physical material to the end user, but the R&D costs are high since it still requires all kinds of equipment/tools and a lot of time. Developing even simplest productized application can take a man year, and more advanced ones tens of man-years.

[esldude]

Yes, 10% is the number typically bandied about.

 

Not just consumer electronics either. Even industrial parts work out this way. Friend who is an engineer was given a project to improve some industrial equipment. He spent a year and half on it, ended up with a design that was the most efficient in this industry. His mangers were not pleased however. His R&D was well within budget, but the design would require just short of $2 in additional parts cost per unit and about a $1.5 additional manufacturing cost. Each unit retails for $600 roughly. They considered this cutting into margins too deeply in their competitive field and never implemented his design.

 

Makes you wonder about those $29 DVD players doesn't it.

 

Volume makes a big difference though. Cost per unit goes down greatly when you can order up a 100,000 of something versus 1000 or 100 or 1.

[Jud]

Yes, 10% is the number typically bandied about.

 

Not just consumer electronics either. Even industrial parts work out this way. Friend who is an engineer was given a project to improve some industrial equipment. He spent a year and half on it, ended up with a design that was the most efficient in this industry. His mangers were not pleased however. His R&D was well within budget, but the design would require just short of $2 in additional parts cost per unit and about a $1.5 additional manufacturing cost. Each unit retails for $600 roughly. They considered this cutting into margins too deeply in their competitive field and never implemented his design.

 

Makes you wonder about those $29 DVD players doesn't it.

 

Volume makes a big difference though. Cost per unit goes down greatly when you can order up a 100,000 of something versus 1000 or 100 or 1.

 

I seem to remember Miska saying once that nearly all DACs must use commodity chips because items available in batches of fewer than thousands would be simply unaffordable even in high end equipment. Is that something like what you said, Miska, or did I manage to mangle your meaning?

[thesurfingalien]

In discussion about our favorite hobby I have from time to time encountered the view that component costs as well as research and development costs are only a tiny fraction of the final sales prices.

 

ETC...

 

Cheers,

Peter

 

 

Hi Peter,

 

The problem with single (or limited number) builds is the resulting limited purchase of components. If you, for example, had ordered 100 DACT stepped attenuator, the price per unit would have gone down dramatically. Also, Goldpoint manufactures their own stepped attenuators, and I think their prices are quite a bit lower than DACT. Obviously a single nicely designed housing will add to the price more than the housings Goldpoint uses.

 

Of course mass-produced items "Made in China / Taiwan / etc..." will cost less due to reduced cost of labor. Another thought is that R&D costs are, in case of mass-produced items, spread out over multiple models (for example surround-receivers; same technology but less channels, less power, less connections and less functionality for lower-ranked models).

 

Let's look at loudspeaker cable - Nordost Odin Supreme:

 

Random (advertised) price on Internet:

 

US$ 20,000.00 for a pair, one meter long, terminated with bananas or spades (add another US$ 6,000.00 for each additional meter per pair)

 

For the (guestimated) average of 2.5 meters per channel it will set you back US$ 29,000.00. I imagine these will not sell like crazy

 

But what actually justifies a price like that (US$ 3,000.00 per meter for the cable and US$ 500.00 for each terminator)? I have not got a clue...

 

 

I guess it comes down to exclusiveness, and how a top-of-the-line product is positioned / marketed by the manufacturer. I also assume that this example is targeted at wealthy people, just like the Audio Note amps you mentioned.

 

But in all fairness, if you look at price / performance ratio, this kind of products are not doing too well, no matter how good they are...

 

Regards,

Peter

[The Computer Audiophile]

This topic is far more interesting to most people than it is to me. for some reason I really don't care about the cost of parts and R&D as a percentage of the final price. Components cost what people will pay. If I want a product that costs $10 in parts and R&D but sells for $10,000 it's a simple math equation of whether or not I can afford the $10,000. If not I simply move on or find a way to afford it by sacrificing somewhere else.

[ringenesherre]

This topic is far more interesting to most people than it is to me. for some reason I really don't care about the cost of parts and R&D as a percentage of the final price. Components cost what people will pay. If I want a product that costs $10 in parts and R&D but sells for $10,000 it's a simple math equation of whether or not I can afford the $10,000. If not I simply move on or find a way to afford it by sacrificing somewhere else.

 

Hi Chris,

 

I can understand your point of view (and was actually guessing this would be a popular standpoint), but for me having some idea that I actually receive some value (either in high-quality components or R&D effort) is somehow reassuring.

 

Of course, I understand that this is no guarantee for superb performance ...

 

Cheers,

Peter

[Jud]

This topic is far more interesting to most people than it is to me. for some reason I really don't care about the cost of parts and R&D as a percentage of the final price. Components cost what people will pay. If I want a product that costs $10 in parts and R&D but sells for $10,000 it's a simple math equation of whether or not I can afford the $10,000. If not I simply move on or find a way to afford it by sacrificing somewhere else.

 

I'm interested in the topic, but not from the "How can they charge that much?" or "Am I getting ripped off?" point of view I read fairly frequently. I'm more interested in (1) specifics about the technologies in leading edge equipment; and (2) any information that might indicate these technologies may soon be available more widely and at a price point accessible to me. Think for instance of async USB input.

[James1776]

Just responding to the thread title so far, I have to say that on of my biggest issues with high end audio is the $100 worth of parts crammed into a multi thousand dollar price.

 

Saying that, what is worse is $100 in parts in a multi thousand dollar price with claims about performance that read more like alchemy than science.

[4est]

Just responding to the thread title so far, I have to say that on of my biggest issues with high end audio is the $100 worth of parts crammed into a multi thousand dollar price.

 

I take it you have not run a low volume manufacturing business here in the US. Common retail mark up alone is 100%. Maybe I am jaded by my woodworking experiences. For instance, the cost of lumber is mostly in the processing and distribution, not the tree itself.

[James1776]

 

for an item priced at a modest $2500...

[sandyk]

James

I could be very wrong , but perhaps it is using a cheap Asian sourced DC protection PCB at the headphone output, and a Delay PCB at the rear for RCA outs ? There is no way of telling what's inside the can.

A friend of mine in Miama swears by Red Wine Audio products though.

Regards

Álex

[ringenesherre]

for an item priced at a modest $2500...

 

Doesn't look like 10% in component costs

[firedog]

I think it depends a lot on if it is a consumer factory assembled product or a hi-end one with small volume. A lot of the products discussed at this site come from one man operations or if a larger business, still a very small one with a handful of employees.

 

I have no problem if these very small businesses charge "outrageous" prices if their product is superior to similar less expensive products, or if they are offering something unique. The people who own these kinds of businesses do all the R and D, admin, etc themselves. Often they also assemble or repair the products themselves. So to make a profit they have to value their direct labor costs very highly. Say $1oo or $150 an hour- because the amount of time they can spend in actual direct labor on the end product is very small. And the number of actual units sold may only be in the dozens per year.

 

At that level, just the assembly time for the product is going to guarantee that it is very expensive.

 

For the more established manufacturers the cost structure is different, but still pretty prohibitive. I've seen ballpark figures that say for each dollar in parts cost, figure $5-$7 cost at retail. This takes into account 100% markup to wholesalers, and another 100% markup at retail. We may not like it, but that's how those people stay in business and provide a service to retailers and to us.

 

Add in financing inventory and marketing and you can see how that 5-7 times multiple comes about. It also explains why manufacturers will use a cheaper part, even when it seems to be a small price difference. Add in a few dollars in parts cost, and suddenly the retail price of the product jumps $50-$100; that's enough to price you out of your market in lots of cases.

 

The above also explains why the "internet direct" sales model is catching on, even if it means we don't get dealer service and can't audition equipment.

 

Anthony Michaelson of MF has said that the cost of the cosmetics of audiophile equipment is the source of 50%-70% of the final retail price. All those thick brushed face plates and beautiful heavy knobs cost money. And then the multiple gets added in. That's one of the reasons for his "low cost" V series: Cut way back on the cosmetics, and you can sell good quality units for much less money.

 

For better or worse, it's long established that cosmetics sell equipment better than SQ does-even for most audiophiles. So producers often put money into cosmetics, with the resulting 'high end" prices to us, whether we care about fancy looks or not. And even when the "parts" cost only a small fraction of the final price.

[Jud]

I think it depends a lot on if it is a consumer factory assembled product or a hi-end one with small volume. A lot of the products discussed at this site come from one man operations or if a larger business, still a very small one with a handful of employees.

 

I have no problem if these very small businesses charge "outrageous" prices if their product is superior to similar less expensive products, or if they are offering something unique. The people who own these kinds of businesses do all the R and D, admin, etc themselves. Often they also assemble or repair the products themselves. So to make a profit they have to value their direct labor costs very highly. Say $1oo or $150 an hour- because the amount of time they can spend in actual direct labor on the end product is very small. And the number of actual units sold may only be in the dozens per year.

 

At that level, just the assembly time for the product is going to guarantee that it is very expensive.

 

* * *

 

Anthony Michaelson of MF has said that the cost of the cosmetics of audiophile equipment is the source of 50%-70% of the final retail price. All those thick brushed face plates and beautiful heavy knobs cost money. And then the multiple gets added in. That's one of the reasons for his "low cost" V series: Cut way back on the cosmetics, and you can sell good quality units for much less money.

 

For better or worse, it's long established that cosmetics sell equipment better than SQ does-even for most audiophiles. So producers often put money into cosmetics, with the resulting 'high end" prices to us, whether we care about fancy looks or not. And even when the "parts" cost only a small fraction of the final price.

 

Just wanted to note (though not disagreeing at all with your points, firedog) that occasionally those knobs are expensive for sonic reasons. I can't go find them right now, but there are a couple of articles/interviews around the interwebs where Keith Johnson and/or Rick Fryer talk about what went into the design and construction of the volume controls on their gear.

[James1776]

James

I could be very wrong , but perhaps it is using a cheap Asian sourced DC protection PCB at the headphone output, and a Delay PCB at the rear for RCA outs ? There is no way of telling what's inside the can.

A friend of mine in Miama swears by Red Wine Audio products though.

Regards

Álex

 

It may be a spectacular piece of gear, but it is also an almost empty box with a rather hefty price, and the price was prominently listed as 'starting at'...

 

My point is that a lot of gear is air in a box. I would have been impressed if the cost was half as much. It was simply selected as an example because it was the first high end brand I found with a picture of empty innards.

[The Computer Audiophile]

Just wanted to note (though not disagreeing at all with your points, firedog) that occasionally those knobs are expensive for sonic reasons. I can't go find them right now, but there are a couple of articles/interviews around the interwebs where Keith Johnson and/or Rick Fryer talk about what went into the design and construction of the volume controls on their gear.

 

 

Hey Jud - Here's a link to some discussion about Spectral boards and at the bottom info about the Super Fader volume control.

 

Spectral Info